I haven’t gone on an Italy rant for a while, but with healthcare and taxes filling the US airwaves, it has really made me think about taxes in Italy. I’ll not get into my opinion of these subjects in the US, since this is not the place for it. I also don’t want anyone to see this as a point of comparison, be it to say ‘at least we are not that bad’ on one side, or ‘hey! look at the road we are going down’ on the other. It is merely a subject on my mind right now, and Italian Tax Lunacy is truly epic.
OK, the prerequisite disclaimers are now out of the way. Italy is a wonderful place. It is beautiful, the culture is amazing, the people are warm, and the lifestyle is enviable. You simply cannot have all of this good without some utter evil to balance it all out. That evil comes in several forms, the largest of which is a department of the government called FINANZA. They are Italy’s answer to the IRS, but they are not government workers in suits that sit down and go over your tax returns with your accountant. No, they are a police force, complete with squad cars, military-style uniforms, arms, and a mission to fight crime. Tax crime.
Piove, Governo Ladro!
Strictly translated, this means “It’s raining, Government Thief”. What it really means is that the government takes so much from us, in so many ways, that they have even found a way to steal the sunshine. There is an epic battle of taxes between the government (represented by the Finanza) and the people in Italy, and they have been waging it longer than anyone can remember. Italians are notorious for tax evasion, and the Italian government is notorious for Draconian taxation. A citizen will tell you that they take so much, he is forced to cheat in order to put food on the table. The government will argue that so many citizens cheat on their taxes, that they are forced to take special measures in order to collect. Can you say viscous circle? I knew you could.
I Cheat, You Cheat, We All Cheat on Taxes
I’m an American. I pay my taxes. I hate it, but I do it. If i can get a deduction, I’m all for it, but the concept of cheating on my taxes just doesn’t exist. I’ve never met another American that boasted about how he cheats on his taxes. But in Italy, you run across people every single day that will shout it from the tower (figuratively, of course). For these people, it is a matter of pride. Success in cheating on one’s taxes is a badge of honor. HA! I got the government thief! In fact, some estimates show that only 50% of Italians pay any income taxes at all. and a large majority of the remainder grossly underfile. Now, before I get chastised by anyone that lives in Italy and does pay their taxes, let me be clear. This rule does not apply to everyone. I know people that follow the letter of the law as they understand it. The key phrase here is ‘as they understand it’, because if you ask 10 tax lawyers, you will get 10 answers as to what is and what is not legal or appropriate. All 10 are right, and all 10 are wrong. But one thing I have noticed is that those that try to stay legal are generally the ones that are just scraping by. Sad, but true.
The Amnesty Countdown
I always wondered how people don’t get caught. I mean, if I don’t pay my income taxes, sooner or later it has to catch up with me, right? So I asked around, and what it all really boiled down to was ‘Amnesty’. Apparently every so many years, the government has traditionally enacted an amnesty program for tax evaders. If you don’t pay your taxes, the government bureaucracy is so crippled and slow, that by the time they could ever really do anything to you, amnesty typically kicks in. I know people that have had 75% of all of their back taxes slashed with no penalty. They paid their reduced amount, then went on to not pay taxes again… until the next amnesty program. How must the people that actually try follow the law feel, when they realize that by following the rules, they got what amounts to a 75% penalty compared to the cheaters? I suppose it is similar to how I feel as someone that actually pays his mortgage these days, thus cannot qualify for ‘Loan Modification’.
There’s a Tax For That
So how bad are the taxes? I won’t bore you with marginal tax rates and calculations. Instead, I’ll list some of the taxes and policies that have made me scratch my head and say WTF over the years…
Italy has a few state-run television channels called RAI. They pay for it through something called the ‘Canone RAI’, which is essentially the RAI Televition tax. Your are required to pay it if you own a television, and it is calculated based on how many televisions you have. Even if you are in an area that gets no reception, and/or your pay for satellite television service… you MUST pay this tax. The penalty for not paying it? Well, if you don’t pay it, they may come and inspect your home. Pay or have your televisions sequestered. There is good news, however. The tax rate is lower if you only have a black and white television!
When I originally lived in Italy, there was also a radio tax for automobiles. The Finanza would set up roadside traffic checks to make sure you paid your registration fees. While stopping you, they would inspect your car, and if you had a radio, they would check that you paid the radio tax. I was actually cited for this once. This tax no longer exists.
In the late 90’s when the Internet was gaining strength in Italy, the government saw a growing potential source of revenue among small Internet providers. They instituted a special tax on modems that essentially killed this business, leaving it almost solely to the quasi state run phone company.
A few years later they decided that there was not only a special tax for those with websites, but as a webmaster, you were required to save a copy of your website and submit it to the government… Each time it changed. Consider our own site: we would be required to submit a new CD right now…. and another now… Oops, our dynamic site changes by the second so we need to submit it again now.
The IVA is the Italian sales tax, or VAT (Value Added Tax). It is a flat 20% for all purchases, and is paid at all levels from manufacturing all the way down to consumer. It is then refundable at each level until a product or service reaches the consumer, making for some very complicated paperwork and bureaucracy, of course. The only exception to the 20% is a reduced 10% and 4% rate on what is considered to be ‘essentials’. Before the formation of the EU, Italy’s IVA was somewhat more complicated. The base rate was 19%, but there was a special 38% tax rate for ‘Luxury Goods’. What was considered a luxury? Any car that and an engine of more than 2,000cc was a luxury, Your home stereo was a luxury, etc. The reduced rate for essentials like food and clothing was 4% as it is now, but the one thing that always puzzled me was that shoes were not categorized as ‘essentials’!
Income tax in Italy ranges between 23% and 43%, which may not seem so bad until you have to actually pay them and learn that Italians don’t enjoy the ability to apply tax deductions anything like what you may be accustomed to. In addition to that is a concept of minimum base income that I have never fully understood. Perhaps someone will comment and clarify it for me? As it has been explained to me by several people, if you are self-employed, what you earn is not initially assumed based on what you declare. Instead, it is based on what you have and what you do. In other words, if I own a clothing store that is 100 square meters in size, there is an assumption that this type of store should make a certain amount of money. I pay that, and if I didn’t make that much, it is my responsibility to prove that I didn’t and file for a refund after the fact. In other words, you can potentially pay more in tax than you grossed. Similarly, it has been explained that your base minimum income is assumed by your possessions. That is to say that if I own a home of 200 square meters, and I have a certain car, and I own a motorcycle… I must make a certain amount of money to support that lifestyle, so that is the minimum I am taxed on. So if your favorite aunt passes away and leaves you her home at the beach, a car, and a boat…. the government may see you as a very high income earner with a fleet of vehicles and a beach house for weekend getaways.
Get Your Scontrino.
The ‘scontrino’ is your receipt when you make a purchase at a store. Back to tax enforcement, this is another process that has been relaxed, thankfully. The Finanza is charged with not only making sure you pay your taxes, but also making sure you are equipped to do so. This means that if you have a store, you must have an approved cash register that prints receipts in a certain way. In addition, you are required by law to provide a receipt to every customer. So far, so good, right? But the customer is also required by law to obtain the receipt, and to take it with him as he leaves the store. So until recently, you could walk into a store and buy a pack of gum. Maybe you simply threw the receipt in the trash, or you left it as you exited. As you left the store, you could have been approached by a Finanza officer who would ask you to show your receipt. If you failed to produce it, they would detain you and bring you back to the store. Once there, the clerk would have to prove they gave you a receipt. If he couldn’t, he would get a large fine. Either way, you would have been fined for not being able to produce it on demand.
This would get taken to the extreme. For example, I knew an owner of a small grocery/deli. One day he was hungry and made himself a sandwich. As he was eating the sandwich, a Finanza officer entered his store and demanded to see the receipt for the sandwich he had just made for himself. Naturally he was dumbfounded, and wound up paying a fine equivalent to $500.00.
Another time, my father-in-law was chatting with the same man in his store. They were very close friends. He had spent about an hour chatting, as they often did. The man offered him a slice of pizza as they were talking, and when he left, he was still eating it. My father-in-law was instantly approached by a Finanza officer who demanded a receipt for the pizza slice. He explained that there was none as it was just a friendly gesture of kindness from a close friend, not a purchase. The result: They were both fined. The store owner should have rung up the pizza slice, and placed the retail value in the register in order to offer it to his friend.
Not only could they charge the store, but the finanza could also perform an instant on-site audit. They could actually walk into the store, close you down and say “Pull out your books”.
Would You Like a Fattura or a Ricevuta?
Since the taxes in Italy are so high and complicated, there is an underground economy. When you make a large purchase, you will often find people quoting you TWO prices: One ‘with fattura’, and one without. The Fattura is essentially the fiscal invoice. If you are given one, the income cannot be hidden. If they don’t give you one, and you pay cash… well, let’s just say that they save a bundle. What always amazes me is how out in the open this is. It is just the way things are done, and isn’t hush hush at all.
Tax the tax with another tax, why don’t we?
I’ve touched on a few taxes and processes, but Italy is replete with taxes on just about everything. I could go on forever talking about inheritance tax, gift tax, double-payroll tax, capital gains tax, and the notorious “Once in a While Tax“, but this is getting fairly long.
OK I’m Done
There is my rant. I feel better now. Actually, I must admit that for now, I am happy to be in a position to have our company incorporated in the US, such that the lion share of our taxes are based on US income. FOR NOW, we don’t have a quasi-military strike force there to protect the world from evil would-be shopkeepers that rob the system by offering slices of pizza to their friends.